The sky’s the limit

With aviation likely to be badly hit in the economic downturn, Theresa Cummins examines why Ryanair soar while other airlines sink.

Over the last few months, the airline industry has suffered greatly from the destructive effects of the credit crunch, with tightening credit conditions and the soaring fuel costs forcing many airlines to file for bankruptcy.

In these turbulent times, it is relieving to hear that there are some potential benefits to be gained in this sector. Ryanair’s chief executive, Michael O’Leary, recently announced that he plans to develop a transatlantic service, offering low-cost routes from Europe to the US.

O’ Leary said that this no-frills budget flight service could become a possibility in less than three years. This initiative, originally proposed a year ago, may be strengthened by the current decline in the aviation sector.

Through his remarkable innovation, O’Leary may not have made many friends among his peers, but he certainly secured his reputation of Ireland’s most intriguing money mogul.

Humorous anecdotes about the Mullingar man, such as the fact that he bought a hackney plate for his Mercedes to enable him to take advantage of the bus lanes in Dublin, have ensured that his outlandish antics as well as his business style keep him in the newspapers.

In an industry, which is currently strewn with the rotting corpses of mechanical birds you really have to marvel at the ability of Ryanair to rise triumphantly over the decay. This industry, which has recently seen the collapse of airlines such as Nationwide, XL Airways and Oasis Hong Kong Airlines, has faced many difficulties such as highly volatile fuel prices (crude oil prices that reached $147.27 a barrel in mid-July are now down 44 per cent to today’s price), increasing competition and a reduction in consumer spending.

The implication of a lack of credit in the markets for the aviation industry is that aircraft financing becomes scarce and more expensive, causing substantial problems for financially struggling airlines. Yet, O’Leary is using the depression in the sector to his advantage. With many of the competitors going under, the availability of discounted long-haul aircrafts may become a profitable opportunity fit to be exploited.

O’Leary, often described as Ireland’s uncrowned king of aviation, has undoubtedly been one of the main reasons behind the success of Ryanair. His abrasive, uncompromising style revolutionised the airline in the early 1990s, transforming it from a loss-maker into Europe’s largest low-cost carrier.

Buying aircrafts at a reduced rate from financially struggling airlines has become a hallmark of Ryanair’s strategy for expansion

The low-fares airline magnate remains one of the most controversial figures in the sector, frequently attracting media attention over disdainful, and often vulgar, outbursts about competitors, governments and regulatory authorities alike.

Despite this unyielding reputation, his no-nonsense style and cost-saving techniques have to be admired for elevating Ryanair as one of the most progressive airlines in Europe.

He is now hoping to benefit from this downturn, in a similar way to having gained from the post 9/11 slump in air travel in 2001. With a significant decline in aircraft orders from the reduction in passengers after the aircraft attacks, O’ Leary managed to order 155 new Boeing 737-800 series from the company at a considerable discount.

Buying aircrafts at a reduced rate from financially struggling airlines has become a hallmark of Ryanair’s strategy for expansion. In 2003, the airline acquired one of its smaller rival competitors, Buzz from its Dutch parent, KLM, at a significantly reduced price.

This move, which reinforced their position in Europe, came at a highly favourable time, with Buzz struggling financially since 2001. Now, he is looking at the potential synergies available through canceled orders placed with Boeing and Airbus from bankrupt or failing airlines.

“There may be an opportunity to pick up cheap long-haul aircraft next year, in which case we might launch a low-cost, long-haul programme in two-and-a-half-years” O’ Leary explained. The new carrier would be separate from Ryanair and would fly from nine bases across Europe, with Long Island suggested to be a likely base for New York.

The plans for a transatlantic service are reported to be made possible by either a takeover of Aer Lingus or through leasing arrangements with Boeing that would prove favourable to Ryanair. Ryanair’s Chief Financial Officer, Howard Miller, said in late September that the takeover of Aer Lingus was not essential to the plan to develop this transatlantic service although it would be advantageous.

Ryanair’s previous attempts to take over Aer Lingus had been denied. In October 2006, Ryanair offered a €1.48 billion bid to buy the Irish flag carrier, and was subsequently rejected. This proposed takeover was met by strong opposition by the EU, which argued that the merger of Ireland’s two largest airlines would be detrimental to the consumer, resulting in higher prices and reduced competition.

Yet the current climate in aviation may encourage the acquisition of the airline. “The industry is in a rapid period of change”, noted Miller, “small carriers will not survive as Europe moves towards recession.”

With the unprecedented prices of oil and a lack of available funds in the markets, many of these carriers did become casualties of the credit crunch. Although analysts in the sector seem skeptical about Ryanair’s chance of success with their proposed new venture, the timing may just be perfect.

Despite Ryanair plans to exploit the current downturn in the sector, it did not escape unscathed from the effects of the credit crunch, with the airline reporting that it expected to break-even next year. There are talks of a 10 per cent pay cut for senior management, and staff in the Stansted and Dublin airports taking one week’s unpaid leave in an effort to reduce costs.

The news of a Ryanair transatlantic service coincides with the recent dismal reports from Aer Lingus, which estimate losses of up to €100 million next year, and expected job losses of 1,500. Although the chief executive isn’t interested in running the new carrier himself, he suggested he may back the venture along with other Ryanair investors, prudential and private equity firm TPG.

This availability of capital, along with the potential cost-savings to be gained from reduced long-haul aircraft, could help elevate Ryanair as one of the world’s largest airlines.